Aerospace Tax Preferences
Summary
Review focuses on nine tax preferences intended to benefit the aerospace industry
In 2013, the Legislature expanded a package of aerospace tax preferences that was initially enacted in 2003. The preferences include three preferential business and occupation (B&O) tax rates, two B&O tax credits, two sales and use tax exemptions, a property tax exemption, and a leasehold excise tax exemption. Detail is provided in Appendix A.
To claim a preference, a business must perform at least one of these activities:
- Manufacture commercial airplanes.
- Develop aerospace products (e.g., airplanes, components, repair equipment, and tooling).
- Repair aircraft.
The preferences are scheduled to expire July 1, 2040.
Estimated Biennial Beneficiary Savings
$569 million in the 2021-23 Biennium
Tax Types
Business and Occupation Tax, Sales and Use Tax, Leasehold Excise Tax, Property Tax
Multiple RCWs
The preferences lower the cost of doing business. The aerospace industry remains in Washington, and its employees earn wages above the state average and are provided benefits.
The Legislature stated three public policy objectives when the preferences were initially enacted in 2003, and added a fourth policy objective when extending the preferences in 2013.
| Objectives (Stated) | Results |
|---|---|
| Reduce the cost of doing business in Washington for the aerospace industry compared to other states. | Met. The preferences save beneficiaries more than $500 million per biennium. They improve the state’s competitive position by cutting the industry’s effective tax rate by at least 50%, making the rate lower than 5 out of 13 competitor states. (Tab 1) |
| Encourage the continued presence of the aerospace industry in Washington. | Met. Aerospace continues to be a major industry in Washington. However, it is unclear to what extent the preferences influenced location decisions. (Tab 2) |
| Provide jobs with good wages and benefits. | Met. Aerospace industry employees earn wages and benefits well above the state average. (Tab 3) |
However, aerospace employment is lower than it was in 2013. It is unclear whether the preferences prevented greater job losses.
| Objectives (Stated) | Results |
|---|---|
| Maintain and grow Washington's aerospace industry workforce. | Unclear. Washington aerospace employment is lower than it was in 2013, but higher than when the preferences were first enacted in 2003. (Tab 3) If the preferences led Boeing to remain in Washington, they may have kept the state from losing more jobs. If not, they reduced government spending and may have contributed to job losses. (Tab 4) |
Recommendations
Legislative Auditor's Recommendation: Clarify
The Legislature should clarify its expectations for the level of aerospace industry employment. Providing additional detail in the tax preference performance statement such as a baseline level of employment would facilitate future reviews of these preferences.
More information is available on the Recommendations Tab.
Commissioners' Recommendation
The Commission endorses the Legislative Auditor's recommendation with comment. The tax preference continues to meet the majority of stated objectives. However, the employment objectives are ambiguous. The commission recommends the Legislature clarify its position on employment levels.
Regardless of how the Legislature clarifies this issue, the Legislature must be very cautious in how it interprets and responds to employment changes as a factor in the preference’s efficacy. The industry, like manufacturing in general, are rapid adopters of new technology that enhances productivity. This has the potential to significantly lower the labor input over time. Also, business cycle events, which are outside the industry’s control, may lead to significant declines in employment that can persist for several years. In addition, the Legislative Auditor’s research and aerospace industry testimony shows that the industry provides above-average investment spending, wages and benefits, and workforce training. None of these areas can be captured by an analysis of changes in employment.
Given the above, employment changes by themselves are insufficient for evaluating the preference’s efficacy. Therefore, the commission recommends that the Legislature continues to evaluate the preference on a regular cycle using a range of objectives, with employment levels being only one of the considerations. The current JLARC process, based on multiple objectives, provides the most transparent and valid method for determining the degree to which the majority of objectives are met and whether or not the Legislature needs to adjust the preference.
Committee Action to Distribute Report
On December 4, 2019 this report was approved for distribution by the Joint Legislative Audit and Review Committee.
Action to distribute this report does not imply the Committee agrees or disagrees with the Legislative Auditor recommendations.
Aircraft Part Prototypes
One Page OverviewPreference applies to the sale of materials used to make prototypes of aircraft parts and equipment
The exemption applies to sales or use of:
- Materials incorporated into a prototype for aircraft parts, auxiliary equipment, or modifications.
- Materials that are incorporated into a prototype but later destroyed in the testing or development of the prototype.
The preference is limited to businesses whose gross income and value of products manufactured had a combined total value of $20 million or less in the previous year, minus any multiple activities tax credit claimsThe multiple activities tax credit is specified in RCW 82.04.440. A business may not claim more than $100,000 in tax savings from this preference in a calendar year. To claim the preference, a business must first pay the tax on a sale subject to the preference, and then apply to the Department of Revenue (DOR) for a refund. A 2014 JLARC review of the preference includes additional detail.
The preference does not have an expiration date.
Estimated Biennial Beneficiary Savings
None
In 2014, the Legislative Auditor found no businesses were claiming the tax preference and recommended termination
The Legislature stated two public policy objectives when it enacted the tax preference in 1996. The preference was part of a larger bill that addressed machinery and equipment used in research, development, and testing. The objectives applied to all exemptions in the bill.
JLARC staff reviewed the preference in 2014. Because the review found no businesses were claiming the tax preference, the Legislative Auditor recommended that the Legislature terminate the preference as it had not contributed to the stated public policy objectives.
| Objectives (Stated) | 2014 JLARC Review Results |
|---|---|
| Encourage, develop, and expand opportunities for family wage employment in manufacturing industries. | No businesses claim the tax preference. |
| Solidify and enhance the state’s competitive position. |
With no legislative changes to the preference and no beneficiaries, the Legislative Auditor's 2014 conclusions and recommendations remain applicable
No substantive legislative changes. Since 2014, three bills have proposed broad changes to all tax preferences. While each bill would have affected this preference, none included provisions specific to it. None of the bills passed.
No businesses claim the preference. Beneficiaries must pay the sales or use tax and then apply for a refund from DOR. This process allows DOR to track the number of firms that claim the exemption. DOR reports that there have been no requests for refunds, and thus, no beneficiaries. Efforts to reach two Washington companies that supported the legislation to create the preference in 1996 were unsuccessful. In 2014 these same companies indicated they were not claiming the preference.
Recommendations
Legislative Auditor's Recommendation: Terminate
The Legislature should terminate the sales and use tax exemption for prototypes for aircraft parts, auxiliary equipment, and modifications because the tax preference is not being used and has not contributed to the stated public policy objectives.
The Legislature may wish to consider other strategies beyond this tax incentive to accomplish the public policy objectives.
More information is available on the Recommendations Tab.
Commissioners' Recommendation
The Commission endorses the Legislative Auditor's recommendation without comment.
Committee Action to Distribute Report
On December 4, 2019 this report was approved for distribution by the Joint Legislative Audit and Review Committee.
Action to distribute this report does not imply the Committee agrees or disagrees with the Legislative Auditor recommendations.
Commercial Airplane Parts: Place of Sale
One Page OverviewWith preference, sales of certain airplane parts whose final inspection takes place outside of Washington are exempt from B&O tax
The preference applies to certain airplane parts that are made by out-of-state manufacturers and sold to a Washington manufacturer of commercial airplanes. Sale of these parts is exempt from B&O tax if the place of sale ꟷ defined for the preference as the location of final testing or inspection ꟷ is outside Washington. A 2014 JLARC staff review of the preference includes additional detail.
The preference does not have an expiration date.
Estimated Biennial Beneficiary Savings
$620,000
2014 review concluded that the preference appeared to conflict with a public policy objective to reduce the cost of doing business in state
When the Legislature expanded aerospace preferences to in-state suppliers in 2008, it stated three broad public policy objectives:
- More comprehensively address the cost of doing business in Washington compared to other states.
- Encourage the continued presence of the aerospace industry for a broader group of suppliers.
- Provide well-paying jobs.
When reviewing this preference in 2014, JLARC staff also inferred a fourth objective – to clarify place of sale of certain airplane parts. The preference met this objective by defining place of sale. However, JLARC staff found that it appeared to conflict with the Legislature’s stated objective of reducing the cost of doing business in Washington as compared to other states. Specifically, the preference provided greater tax advantages to out-of-state airplane part manufacturers than to in-state manufacturers. A Washington commercial airplane manufacturer could still benefit indirectly to the extent that the out-of-state parts manufacturer chose to pass on its taxpayer savings to the buyer.
Source: JLARC Analysis of RCW 82.04.627 and WAC 458-20-193.
In 2014 review, Legislative Auditor recommended reviewing and clarifying the preference
The Legislative Auditor recommended that the Legislature review and clarify the preferential tax treatment provided to out-of-state manufacturers and consider adding reporting or other accountability requirements to provide better information on use of this preference.
Limited data is available to analyze use of the tax preference for 2019 review
There is no specific reporting line for the preference, and out-of-state beneficiaries may not need to register with the Department of Revenue. For these reasons, it is difficult to determine the exact number of beneficiaries that claim the preference or the actual amount of tax savings.
However, based on the available data, JLARC staff identified three businesses that claimed the preference in fiscal years 2016 and 2017. Based on this data, estimated beneficiary savings are $620,000 per biennium. JLARC staff found fewer than three beneficiaries that claimed the preference in fiscal year 2018. Actual figures may be higher.
Legislative Auditor's conclusions and recommendations from 2014 remain applicable
The Legislature has made no substantive changes to the preference since the 2014 review.
- One bill, enacted in 2015, updated Federal Aviation Regulation (FAR) citations and references in the statute governing the preference. The bill did not substantively change any of the provisions governing the preference.
- Three other bills were proposed, but did not pass. Each would have made broad changes to all tax preferences, but included no substantive provisions specific to this preference.
As a result, the preference continues to provide greater tax advantages to out-of-state airplane part manufacturers than to in-state manufacturers.
Recommendations
Legislative Auditor's Recommendation: Review and Clarify
The Legislature should review and clarify the preferential tax treatment provided to out-of-state manufacturers because it seems to run counter to the Legislature’s stated policy objective of reducing the cost of doing business for Washington compared to locations in other states.
In addition, the Legislature may want to consider adding reporting or other accountability requirements that would provide better information on out-of-state manufacturers’ use of this preference.
More information is available on the Recommendations Tab.
Commissioners' Recommendation
The Commission endorses the Legislative Auditor's recommendation with comment. The tax preference addresses what had previously been an area of significant dispute between taxpayers and the Department of Revenue on sourcing of sales where final inspection of the products for FAA purposes occurs outside of Washington. The Legislature should clarify this by continuing the preference and re-stating that its purpose is to define the place of sale as opposed to reducing Washington’s cost of business. Doing so will avoid further disputes and will not require further reporting for this structural clarification.
Committee Action to Distribute Report
On December 4, 2019 this report was approved for distribution by the Joint Legislative Audit and Review Committee.
Action to distribute this report does not imply the Committee agrees or disagrees with the Legislative Auditor recommendations.
Commuter Air Carrier Airplanes (Property Tax)
One Page OverviewQualifying commuter air carriers are exempt from property tax if they pay a special excise tax on their airplanes
The preference provides a property tax exemption for commuter air carriers if they pay a special aircraft excise tax on the airplanes they own and operate. The preference is limited to commuter air carriers that are primarily located on privately owned property.
Commuter air carriers:
- Operate "small aircraft" with 60 or fewer seats.
- Carry passengers on at least 5 round-trip flights per week.
- Fly according to published flight schedules.
The preference took effect January 1, 2014, and has no expiration date.
Estimated Biennial Beneficiary Savings
$186,000 to $254,000
JLARC staff separately reviewed a sales and use tax exemption for commuter air carriers that purchase and repair airplanes used primarily for in-state travel. The 2019 review can be found here.
Inferred public policy objectives
The Legislature did not state a public policy objective when it passed this preference in 2013. JLARC staff infer two public policy objectives based on testimony to the Legislature.
| Objectives (Inferred) | Results |
|---|---|
| 1. Streamline and simplify tax reporting for qualifying commuter air carriers. | Met. The preference is streamlining and simplifying tax reporting for one beneficiary and the Department of Revenue. |
| 2. Provide an alternative to property tax for certain commuter air carriers if they pay an aircraft excise tax that is similar to the amount they would have paid in property tax. | No longer met. JLARC staff estimate the one qualifying commuter air carrier pays between 50% to 63% less in excise tax than it would have paid in property tax. |
Recommendations
Legislative Auditor's Recommendation: Modify
The preference is meeting one of two inferred objectives. While it is simplifying reporting for one taxpayer and the Department of Revenue, it is not providing an alternative to property tax that results in a similar amount of tax paid.
The Legislature should modify the preference to:
- Provide a method to equalize commuter air carrier excise tax fees on airplanes with property taxes over time.
- Clarify why the preference is limited to commuter air carriers primarily located on private property.
- Provide a performance statement with stated objectives and metrics to determine if objectives are met.
More information is available on the Recommendations Tab.
Commissioners' Recommendation
The Commission endorses the Legislative Auditor's recommendation with comment. Extensive calculations by the Legislative Auditor suggests that current tax methodology is not revenue neutral relative to the older, more complicated methodology. The Legislature should be aware that the lack of neutrality is not the fault of industry; it’s an unintended consequence of much needed tax simplification. Because the new methodology has been in place since 2014, the industry has already budgeted in the current tax going forward. Therefore, should the Legislature decide to adjust the tax, it should be done in a way that increases the burden very gradually. Industry testimony indicates they operate with narrow margins and abrupt changes in costs can be difficult to absorb. The ability to absorb tax changes is an important consideration given that industry testimony and the Legislative Auditor’s research shows the industry provides unique transportation services to residents in remote parts of the state.
Committee Action to Distribute Report
On December 4, 2019 this report was approved for distribution by the Joint Legislative Audit and Review Committee.
Action to distribute this report does not imply the Committee agrees or disagrees with the Legislative Auditor recommendations.
Commuter Air Carrier Airplanes (Sales and Use Tax)
One Page OverviewSales and use tax exemption for commuter air carriers on purchases of airplanes, airplane parts, maintenance, and repairs
The preference provides a sales and use tax exemption for commuter air carriers when they purchase airplanes, or parts, maintenance, and repair services for airplanes, that are used primarily for in-state flights.
Commuter air carriers:
- Operate "small aircraft" with 60 or fewer seats.
- Carry passengers on at least 5 round-trip flights per week.
- Fly according to published flight schedules.
The preference was enacted in 2009 and has no expiration date.
Estimated Biennial Beneficiary Savings
$447,000
One of three inferred public policy objectives met
The Legislature did not state a public policy objective when it passed this preference in 2009. JLARC staff infer three public policy objectives based on legislative testimony by the primary sponsors and industry representatives.
| Objectives (Inferred) | Results |
|---|---|
| 1. Encourage expanded in-state commuter air carrier service. | Unclear. The number of commuter air carriers has increased by one. Flight service has increased to the San Juan Islands, but service has ended in other areas of the state. |
| 2. Maintain air service to Washington's small or rural airports. | Unclear. The total number of airports and airfields served has remained the same between 2009 and 2018, but service locations have shifted. More flights are concentrated in the San Juan Islands. |
| 3. "Level the playing field" with potential out-of-state competition from an Oregon-based commuter air carrier. | Met. Preference removes a potential competitive disadvantage. No out-of-state carriers have directly competed with Washington carriers since 2009. |
Recommendations
Legislative Auditor's Recommendation: Clarify expectations for levels of service and locations served
The Legislature should clarify its expectations for this preference by adding a performance statement that clearly states the public policy objectives and metrics to determine whether the objectives have been met. The Legislature should clarify what it hopes to achieve in terms of frequency of flights and locations served.
More information is available on the Recommendations Tab.
Commissioners' Recommendation
The Commission endorses Legislative Auditor's recommendation with comment. It would be helpful for future reviews for the Legislature to clarify its expectations for this tax preference by adding a performance statement. However, public testimony suggests that any performance metrics must be chosen carefully so as not to be overly burdensome to firms that provide an important service in a low-margin industry. Also, in many cases, economics unrelated to the tax preference will dictate a specific route’s viability and optimal flight frequency. Therefore, metrics related to specific routes and frequency may not accurately reflect the preference’s impact on industry performance. In particular, although the preference likely improves industry viability by lowering costs, linking the preference’s impact to route changes may be difficult and/or overly burdensome to the industry.
Committee Action to Distribute Report
On December 4, 2019 this report was approved for distribution by the Joint Legislative Audit and Review Committee.
Action to distribute this report does not imply the Committee agrees or disagrees with the Legislative Auditor recommendations.
Financial Institutions' Income from Certain Airplane Loans
One Page OverviewPreference provides B&O tax deduction to out-of-state financial institutions when they make loans to Washington-based commercial airlines
The Legislature enacted this preference in 2010. The preference provides a business and occupation (B&O) tax deduction to out-of-state financial institutions when they make loans to commercial airlines headquartered in Washington. The loans must be secured by commercial airplanes. Out-of-state lenders do not pay B&O tax on income they earn from interest and fees on these loans.
The preference was included as part of broader legislation that extended the B&O tax to service businesses that were not physically present in Washington. The tax applied to businesses that met minimum thresholds for receipts from Washington. As a result, some out-of-state lenders became subject to B&O tax. The preference exempts out-of-state lenders from owing B&O tax on income from airplane loans they make to Washington-based commercial airlines.
The preference does not have an expiration date.
Estimated Biennial Beneficiary Savings
$2.1 Million - $3.4 Million
Preference achieves inferred public policy objective
The Legislature did not state a public policy objective when the preference passed in 2010. JLARC staff infer an objective based on information provided by the Department of Revenue and the airlines impacted.
| Objective (Inferred) | Results |
|---|---|
| Provide targeted financial relief to commercial airlines headquartered in Washington by exempting out-of-state lenders from owing B&O tax on their loan income. The airlines typically pay these taxes as part of their loan agreements with the financial institutions. | Met. The preference is providing targeted financial relief to two commercial airlines headquartered in Washington. Alaska Airlines and Horizon Air Industries have both benefited to date. |
Recommendations
Legislative Auditor's Recommendation: Clarify the intent and duration
The Legislature should clarify the intent and duration of the tax preference. If the preference is intended to provide targeted financial relief to Washington-based airlines, the Legislature should add a performance statement and determine whether the relief is meant to be permanent or time-limited.
More information is available on the Recommendations Tab.
Commissioners' Recommendation
The Commission recommends continue and clarify intent only. Given the Legislature did not add an expiration date in 2010, it can be inferred the tax preference was not intended to be time limited. However, the Legislature should add an explicit performance statement. This would bring it in line with the Legislature’s current requirement that similar tax arrangements have an explicit performance statement. Such a statement would aid future reviews by removing any ambiguity about the Legislature’s intent.
Committee Action to Distribute Report
On December 4, 2019 this report was approved for distribution by the Joint Legislative Audit and Review Committee.
Action to distribute this report does not imply the Committee agrees or disagrees with the Legislative Auditor recommendations.
Hog Fuel to Produce Energy
One Page OverviewSales and use tax exemption for businesses that purchase hog fuel to produce energy
Businesses that purchase hog fuel to produce electricity, steam, heat, or biofuel do not pay sales or use tax on their fuel purchases.
The term "hog fuel" is used to describe:
- Wood waste and other wood residuals, including forest-derived biomass, that are ground into small wood chips.
- These wood remnants are used in boilers and furnaces to produce energy.
The preference originally took effect July 1, 2009. In 2013, the Legislature extended the expiration date to June 30, 2024.
Estimated Biennial Beneficiary Savings
$5.6 Million
Beneficiaries are meeting stated public policy objective
The Legislature stated an objective for this preference in 2013 when it revised the existing sales and use tax exemption for businesses that purchase hog fuel to produce energy.
| Objective (Stated) | Result |
|---|---|
Retain "relatively high wage jobs" in counties with facilities that purchase and use hog fuel. Specifically, each of the facilities that use the exemption should retain 75% of the jobs it had on January 1, 2013. |
Meeting objective. Between January 2013 and December 2017, facilities that used the exemption have retained 94.5% of their jobs. In 2017, 47% of beneficiary employees earned $60,000 or more, which is $9,000 more than the average wage in counties where beneficiary facilities are located. In addition, the percent of employees earning $60,000 or more per year increased in each county cohort between 2013 and 2017. The Legislature's job retention goal continues through 2024, when the preference is scheduled to expire. |
Recommendations
Legislative Auditor's Recommendation: Continue if facilities keep achieving the 75% job retention goal
The Legislature should continue the preference because the statutory employment goal is being met.
The Legislature should monitor facility employment levels through 2023 to determine if they continue to meet the statutory goal.
- If employment levels continue to meet the statutory goal, then the Legislature will need to decide in the 2024 legislative session whether to extend the preference and re-state or update employment goals.
- If employment levels do not continue to meet the statutory goal, then the Legislature should allow the preference to expire on June 30, 2024.
More information is available on the Recommendations Tab.
Commissioners' Recommendation
The Commission endorses the Legislative Auditor's recommendation with comment. If employment goals are not met at any time, the Legislature should analyze whether the tax preference should be continued based on a differing set of goals. The jobs protected by this tax provision are often located in rural parts of the state that continue to struggle with good job opportunities for its citizens.
Committee Action to Distribute Report
On December 4, 2019 this report was approved for distribution by the Joint Legislative Audit and Review Committee.
Action to distribute this report does not imply the Committee agrees or disagrees with the Legislative Auditor recommendations.
Modifying Large Private Airplanes Owned by Nonresidents
One Page OverviewSales and use tax exemption for nonresidents who modify their large private airplanes in Washington
When nonresidents bring their large private airplanes to Washington for modification work, such as customized interiors, they do not pay sales and use tax. These private planes are the size of a Boeing 737 or larger.
The preference took effect January 1, 2014, and is scheduled to expire July 1, 2021.
Estimated Biennial Beneficiary Savings
$11.6 million
After preference passed, Washington businesses began performing modification work
The Legislature stated two objectives for this preference when it was enacted in 2013.
| Objectives (Stated) | Results |
|---|---|
| Promote economic development in Washington's aerospace cluster | Partly met. After the preference passed, nonresidents started to bring their airplanes to Washington for modification work. This resulted in new jobs in Moses Lake and elsewhere in the state. However, the preference has had a negligible impact on Washington's broader aerospace manufacturing industry. |
| Increase tax revenues by promoting a competitive marketplace for modifying large airplanes | Met. Based on economic models, the estimated range in new statewide tax revenue is between $1.8 million and $3.3 million per year. |
Recommendations
Legislative Auditor's Recommendation: Continue and clarify the objective
The Legislature should continue the preference by extending the expiration date before it is scheduled to expire on July 1, 2021.
Since the preference was enacted, several large private airplanes have been modified, or are currently being modified, in Washington. This work was not conducted in Washington prior to the preference. This work has created new jobs and increased economic activity in Moses Lake and elsewhere in the state.
The preference has had a negligible impact on Washington's broader aerospace manufacturing industry. The Legislature should clarify whether the objective of growing the broader aerospace manufacturing industry is relevant.
If the preference is allowed to expire, the modification activity would likely cease.
More information is available on the Recommendations Tab.
Commissioners' Recommendation
The Commission endorses the Legislative Auditor's recommendation with comment. The tax preference should not be linked to an objective of growing broader aerospace manufacturing industry. Public testimony suggests that the preference is promoting economic development and offering highly-paid, skilled employment in a very specialized segment of the aerospace industry. The evidence further suggests that this segment would likely relocate outside of Washington without the preference.
Committee Action to Distribute Report
On December 4, 2019 this report was approved for distribution by the Joint Legislative Audit and Review Committee.
Action to distribute this report does not imply the Committee agrees or disagrees with the Legislative Auditor recommendations.
Property Tax Exemption for Multifamily Housing in Urban Areas
One Page OverviewProperty tax exemption offered by cities for multifamily housing
The Multifamily Housing Tax Exemption (MFTE) is a property tax exemption program that allows eligible cities to target specific areas for multifamily housing development. Pierce County also is eligible. If a city or Pierce County chooses to create a program, it may create additional requirements or restrictions.
Property owners may apply for an 8-year or 12-year property tax exemption for building or rehabilitating multifamily housing. The 12-year exemption requires owners to offer at least 20% of their units as affordable housing, as defined by statute. Cities have the authority to approve and reject individual projects.
The preference has no expiration date.
JLARC staff reviewed a similar preference for multifamily housing in Mason County in 2018.
Estimated Beneficiary Savings
$262 million in Calendar Years 2022-23
The preference is intended to encourage multifamily housing development
The preference was intended to stimulate development of new and rehabilitated multifamily housing – including affordable housing – in cities that plan under the Growth Management Act. It also aimed to allow unincorporated areas within urban growth areas to stimulate housing development near college campuses.
Cities have opportunities to maximize the impact of the exemption
Cities may adopt additional requirements for the exemption so that it meets local planning goals.
- Models indicate that the preference can increase the financial performance of developments. It's unclear how often MFTE provides an incentive to projects that would not otherwise be built. At least 12 cities include financial analysis as a factor when deciding whether to offer or approve an exemption.
- Even with statutory rent limits, households earning less than 80% of the area median income (AMI) in their county could pay more than 30% of their income on housing. At least ten cities have adopted income requirements that are lower than the statutory limits (e.g., 60% instead of 80% AMI).
Without reporting improvements, the Legislature will continue to lack critical information for monitoring the program
Statute requires cities and Pierce County to report information to the Department of Commerce each year. At least 11 cities have failed to report in one or more years, while others submitted incomplete reports that make the data unreliable overall. While reports must include information such as number of housing units, rental prices, and tenant income, Commerce's required reporting, even if followed, lacks the detail needed to evaluate compliance with affordability and other requirements.
JLARC staff collected data from multiple other sources (e.g., city staff, county assessors) to provide the information in this report.
Recommendations
Legislative Auditor's Recommendation: Modify
The Legislature should modify the preference to direct cities to include analysis of profitability as a consideration in offering or approving exemptions.
The Department of Commerce should report annually to JLARC and the relevant policy committees on city compliance with the requirements, as well as the metrics in statute and affordability measures.
The Department of Revenue should report to JLARC and the relevant policy committees on which statutory ambiguities can be resolved through guidance and which require statutory changes.
Commerce and Revenue do not concur. View the Legislative Auditor's response to agency comments. More information is available on the Recommendations Tab.
Commissioners' Recommendation
The Commission endorses the Legislative Auditor's recommendation with comment. The Legislature should pay particular attention to reporting guidelines as it applies to low-income units and residents. In particular, the lack of reporting means the actual number of low-income units and associated rents are difficult to identify. This makes it impossible to analyze how the tax preference is impacting the low-income housing supply. Testimony regarding the City of Olympia’s use of the preferences strongly highlights the current reporting problems.
Finally, public testimony raised the important question of whether the introduction of MFTEs in Washington communities has had the unanticipated consequence of increasing rental costs and squeezing out existing affordable housing. More research is needed to investigate the impacts of this preference on housing affordability in Washington.
While the commission endorses the intent of the Legislative Auditor’s recommendations to Commerce and Revenue to improve reporting and clarify ambiguities, both departments did not concur and cite resource and authority issues to act on this without further legislative action. However, without improvements in clarity and allowable use, the Legislature will continue having difficulty determining the preference’s success. The commission suggests the Legislature could begin with a workgroup to provide options to improve reporting and consistency of use.
Committee Action to Distribute Report
On December 4, 2019 this report was approved for distribution by the Joint Legislative Audit and Review Committee.
Action to distribute this report does not imply the Committee agrees or disagrees with the Legislative Auditor recommendations.
